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Column: CFE’s Bet on Greater Mexico Market Share Means More Combined Cycle Plants

by 198 Mexico News
January 28, 2022
in MEXICO USA TRADE NEWS
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Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process. The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.

Mexico’s government wants to give its state champion Comision Federal de Electricidad (CFE) more market share in the generation segment. It aims to do this by knocking out its competition. Current power sector rules do not give priority to private companies over CFE, or vice versa. Power dispatch is instead awarded based on the variable costs of generation and the reliability of technologies. Today, CFE can’t really compete successfully. Its high variable costs, explained by the use of diesel and fuel oil in many of its plants, a number of workers that causes enormous administrative expenses and the obsolescence of its equipment are the reason why CFE does not contribute more energy to the electrical system. The problem is not the rules but the prevailing operating conditions at CFE.

The energy reform proposed by President Lopez Obrador might not have enough votes to make it through Congress. But changes will happen and are happening to the sector. The Comision Reguladora de Energia (CRE) isn’t authorizing new generation permits to private companies. In parallel, CFE has set up an ambitious plan to build more plants. Its goal is to have an additional 9,075 MW online by the third quarter of 2024. CFE has projected 1,000 MW of photovoltaic energy in Sonora and 25 MW of geothermal energy in Veracruz. There are significant doubts about the transmission capacity around the Sonora project. Rehabilitation of hydroelectric dams will barely increase installed capacity by 305 MW (3% of the planned total). About 85% of the incremental capacity will come from gas-fired combined cycle or internal combustion plants.

In other words, the rescue of CFE will mean a lot more natural gas capacity. In recent days, 2,261 MW of new projects have been announced. CFE has directly awarded contracts to companies to carry out the works. Mitsubishi Power will be in charge of the 422 MW San Luis Potosí combined cycle power plant and the 932 MW Salamanca combined cycle facility. The consortium formed by TSK and Siemens Energy will develop the 256 MW El Sauz II plant, also with combined cycle technology. Wärtsilä has been awarded two projects in the northwest of the country with internal combustion for a total of 630 MW.

The fuel for the projects in the San Luis Potosí, Salamanca and El Sauz plants has no other way of being supplied than by gas pipelines that carry imported gas. The obvious route for the 45 MMcf/d needed for El Sauz II is the Sur de Texas-Tuxpan pipeline followed by Transportadora de Gas Natural de la Huasteca, or Naranjos-Tamazunchale-El Sauz.

The Salamanca plant would need 150 MMcf/d of gas originating from the marine pipeline. This would depend on the Tuxpan-Tula route being finished, which requires a route change that avoids the areas of social conflict north of Puebla. As this scenario does not seem likely in the short term, the supply would come from the Fermaca system, which moves gas from the Waha basin in Texas. The San Luis Potosí plant needs 75 MMcf/d of natural gas with the capacity that CFE has contracted in Sistrangas. Imports would come through Cd. Camargo (where the Ramones project begins) and would run through the Gasoductos del Noreste and TAG systems. Alternatively, with the authorization of an interconnection in Villa de Reyes and with a counterflow service through the Sistrangas, San Luis Potosí could commercially receive gas from Waha.

In the case of the Wärtsilä projects, gas supply would see complications in the short term. Both the 40 MMcfd needed for San Luis Río Colorado and the 85 MMcfd needed to feed Mexicali do not have guaranteed gas supply upstream or the necessary gas branches to carry the gas in the last few miles.

[Empower Your Business: Check out NGI’s newly updated Mexico Gas Price Index and Mexico Data Suite, which now includes daily, bidweek and forward natural gas prices at 43 locations in Mexico. Learn more.]

In Baja California Norte, in the summer there are significant levels of congestion in the connection between North Baja and the Rosarito Pipeline. In recent years, peak demand for electrical energy has seen emergency protocols being put in place by power dispatch operator Cenace. This protocol involved dispatch at all hours of the day for a few months to the generators participating in the scheme. This protocol aroused the interest of several companies to invest in generation projects in the area. However, the scarcity of gas in the region prevented its completion. The challenge for CFE in this area is to reach commercial and investment agreements to achieve an upstream expansion of the Rosarito Pipeline or an extension of some of the systems it uses in Sonora. It could be an extension of the Samalayuca-Sásabe operated by Grupo Carso or a branch of the Sásabe-Puerto Libertad-Guaymas system operated by IEnova. Perhaps even a virtual pipeline with liquefied natural gas transported by tanker vehicles could be a solution.

Before leaving office on October 1, 2024, President López Obrador wants to see deep change in the energy sector. This would be his great legacy. His electricity system would serve the national interest and does not obey the whims of private companies, he has said. But as he does all he can to prop up CFE, purchases of imported gas from the United States and the combined contribution of numerous private gas pipeline companies are unavoidable. There is no way that all that gas Mexico needs is produced by Petróleos Mexicanos and transported only through the Cenagas system. In the electricity generation segment, CFE might theoretically prevail over its competitors. But technology and fuel will be imported. Mexican energy sovereignty will still depend on Texan gas and German, Japanese and Finnish knowhow.

Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.

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